Trapped In An Insurance Defense Practice? Two Strategic Approaches

 By John W. Olmstead, MBA Ph.D CMC 

Insurance defense practices are under siege. While these practices have always had to deal with low billing rates and unrealistic controls mandated by insurance companies, recent trends have reached levels that threaten the business relationship which has reached an all time low. The core element of the relationship, mutual trust, is in jeopardy. Many of our law firm clients have dropped insurance defense work entirely and have diversified into other practice areas. Insurance defense law firms must now jump through even more hoops to play in the insurance defense arena. For example:

In The Beginning

In earlier times insurance defense firms had very close relationships with their insurance company clients. Many insurance defense law firm clients with whom this author has worked have advised that they used to consider themselves an extension of the insurance company’s claim office. In fact, many founding partners of these firms came from the insurance industry and worked in the claims offices of insurance companies. They attended law school at night and upon completion of law school eventually formed law firms and worked out arrangements with various insurance companies to handle their business. For many years the relationship was a good business partnership. The relationship provided the insurance company with discounted ongoing legal representation for their policyholders and the law firm with a steady flow of work. There were few restrictions levied by the insurance company as to case handling and billing. The law firm simply handled and managed the case and billed the client by the hour for services rendered with few questions asked.

Unique Nature of Insurance Defense Firms

Insurance defense firms face unique challenges that are quite different than those faced by other law firms. Unlike corporate litigation firms insurance lawyers must strike a balance between their duty to the insured and the insurance company. A three-sided relationship exists. Who is the client? While the insurance company pays the legal bills the lawyer has a independent professional responsibility to the policyholder. Often the interests of the insurance company and the policyholder are at odds and the lawyer is caught in the middle of a conflict situation. It is interesting to note that while insurance companies retain discounted services from insurance defense law firms for their policyholders, they retain different law firms charging premium billing rates for their representation when they themselves are involved in litigation. Typically silk stocking corporate litigation firms are used for this work.

Insurance defense firms face very constrained billing rates and flat fee arrangements imposed upon them by insurance companies. This author has seen very few billing rates over $175.00 per hour. The spread between junior associates and senior partners with many years of experience is often less then 30%. The founding fathers of many of the first generation insurance defense firms adhered to the following policies to achieve adequate profitability:

Many of the lessons of the founding fathers of these first generation insurance defense firms have been lost in transition to second generation firms. Many second generation insurance defense firms have tried to spruce up their image in an effort to emulate the corporate silk stocking firms. They have:

  1. moved into high cost A or B office space,
  2. invested heavily in technology without modifying work processes, methodologies, or practices,
  3. lost financial leverage by promoting too many associates to partner,
  4. failed to maintain the same level of client communication and understanding that the founding fathers displayed,
  5. failed to manage and control office expenses,
  6. failed to maintain 2000-2200 annual billable hour production quotas, and
  7. neglected marketing and business development activities which could have resulted in higher levels of work.

The present state of the insurance defense practice presents numerous challenges to the law firm. These challenges simply cannot be ignored – they will have to be faced head-on. The solutions are complex and will require time to sort through. While solutions can come in different varieties, they will take the form of one of two general strategic approaches.

Reinvent The Practice – Stay In The Game

For many firms the appropriate strategy may be to stay in the game. These will be firms that have a well-established reputation in insurance defense, where insurance defense represents a major source of their revenue, and where adequate leverage and profitability and leverage exist. These firms will not be firms that dabble in insurance work. These firms will be committed to this practice area and will focus on it exclusively. They will be innovative client-market driven firms that blend contemporary approaches with the lessons learned from the founding fathers.

While it is too early to foresee the actual particulars, some of the following actions will be required to reinvent the practice and stay in the game:

Exit Or Diversify The Practice

This strategy will be appropriate for firms that desire to get out of insurance defense work entirely or that desire to reduce their dependence on insurance defense work by diversifying the practice. In this way the mix of the practice can be altered. This strategy will not be easy. It will be a rough road and will take time.

Insurance defense attorneys typically do not have the expertise, experience, or the client contacts in other practice areas such as corporate business. Another factor is perceived image. The business community often views insurance defense firms as second rate firms. Often the law firm has in essence branded itself as an insurance defense firm. This can be a difficult obstacle to overcome. Client law firms with whom this author has worked have found that it can take five years or longer to accomplish such objectives.

Specific tactics will depend upon the firm’s size and the amount of insurance defense work in the practice mix. One of the first steps is for insurance defense firms to try to leverage their litigation experience in order to obtain the defense work from self-insured corporations and general corporate representation. In some instances it may be possible to pick up some of the general corporate representation of insurance companies. This will be a tough road.

Larger firms will require some new blood in the firm with expertise, experience, and a book of business in the desired practice areas. This will require insurance defense firms to consider merger or acquisition. Smaller firms may be able to accomplish these objectives completely internally or with lateral partner acquisitions. Both large and small firms should begin extensive programs of continuing education in desired practice areas. Firm and personal marketing plans should place strong emphasis on creating new business relationships as well.

Much work needs to be done by management of insurance defense firms. The process will take time, hard work, and dedication regardless of the strategic options chosen. Now is the time to get started.

John W. Olmstead, MBA, PhD, CMC is a Certified Management Consultant and president of Olmstead & Associates, Legal Management Consultants based in St. Louis, Missouri. Olmstead & Associates is a management consulting firm that works with law and other professional service firms ranging in size from 100+ professionals to firms with solo practitioners. The firm founded in 1984 serves clients across the United States and internationally assisting them with implementing change and improving operational and financial performance.

John has over 46 years of experience working with law and other professional service firms. His assignments have ranged from marketing and strategic planning to other legal management engagements such as organizational change, firm governance, succession and exit planning, implementation of technology, financial management, staff development, partner compensation, and practice management. John has helped clients implement client service improvement programs consisting of client satisfaction surveys, program development, and training and coaching programs. His assignments have covered the spectrum of management issues. However, in recent years much of his time has focused on engagements helping firms with:

John has presented at conferences and workshops for bar and other professional associations at the national, state, and local levels. He has authored numerous articles on law office management in local, regional, and national law office management publications. John is currently serving as Editor-In-Chief, Thomson Reuters Legal Solutions (formally West Group), The Lawyers Competitive Edge: The Journal of Law Office Economics and Management. John also writes a weekly column on best practice tips for the Illinois State Bar Association’s Illinois Lawyer Now Blog.

John has a MBA in marketing and finance as well as a Ph.D. in Business in Organizational Psychology. He is an associate member of the American and Illinois State Bar Associations, a member of the Institute of Management Consultants. John is a past Chair and a current member of the Illinois State Bar Association Standing Committee on Law Office Management and Economics. He is past President and member of the Board of Directors of the Institute of Management Consultants – St. Louis Chapter.

John may be contacted via e-mail at:

Additional articles and information is available at the firm’s web site: and blog at

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